Free, fair and open trade is essential to fostering a thriving global economy. In the past, when economic conditions have deteriorated, we’ve seen governments in developed and emerging economies alike engage in protectionist policies. With growth in many countries slowing this year (tied in part to the crisis in the Eurozone), I’m concerned that protectionism could be on rise. In the end, I believe these policies don’t really protect anyone.
One of the biggest challenges many markets face right now is insufficient growth. In addition to their own domestic challenges, many countries are scrambling to avoid getting pulled in by the Eurozone crisis. Given that the Eurozone is an important trading partner for many emerging economies, there is concern that emerging countries are particularly vulnerable to an increase in protectionist policies. However, the good news is that the percentage of exports from emerging economies in general to Europe has been declining, so the impact would likely not be as great as it would have been a few years ago.
World trade has slowed this year in tandem with a global economic slowdown. According to the World Trade Organization’s (WTO) April report, trade expanded 5% in 2011, less than the 13.8% in 2010. The WTO projected a further slowdown in to 3.7% in 2012. The WTO attributed this possible slowdown to loss of global economic momentum from a variety of shocks, including the European debt crisis.
So far, I haven’t seen a substantial economic impact from the European debt crisis in the emerging markets. I believe emerging market growth, while slowing, has potential over the long term despite the problems in Europe and in the U.S., and in my view, could well outpace those economies. Following Templeton’s usual bottom-up investment research process, we’ve found that the impact of the crisis needs to be examined on a case-by-case basis. Some companies are more dependent on their local economies and others are more dependent on outside market influences. In some cases, demand from emerging markets has actually aided Eurozone exports.
As global investors, we pay close attention to potential or active protectionist acts and look very carefully at anything involving nationalization or foreign currency controls. We strive to keep abreast of these developments because our goal is that our investments in these counties are not going to be expropriated, and that we can get our money out, if necessary.
An Eye on Argentina
Recently, there has been concern about suspected increases in protectionist policies in Argentina, including import limits, limits on foreign land ownership and nationalization of key resources, particularly in the energy sector. We are closely monitoring this situation, but still see opportunity in a few companies in Argentina that have global operations, and where we see good value potential. Even if these companies’ operations did become nationalized, our research leads us to believe they would not necessarily be negatively affected due to their relatively lower dependence on Argentina versus other regional or global markets. The companies that we typically focus on there, while headquartered in Argentina, are global players with a leadership position in their respective markets. Moreover, because investor fear surrounding these concerns has at times contributed to a drop in share prices, we have in the past been able to pick up what we considered to be bargains. That’s not to say that we aren’t cautious about investing in Argentina right now—we are— but we have to look at the total picture and the nuances that come from analyzing different companies in different ways, distinct from what might be occurring in the broader economy.
Right now we don’t envision Argentina going through a massive nationalization program, but the government is going after some very specific companies, particularly in the oil and gas sector. Natural resources, particularly those that are in high demand and/or are scarce, are often a target of protectionism around the world. Bolivia has been nationalizing parts of its energy sector, and China has been limiting exports of rare earth elements, which are essential to operate many of our favorite high-tech gadgets, cars and other essentials of modern living. Indonesia plans to introduce taxes on the export of more than 60 different forms of minerals, adding to a list of 14 metal ores which were subject to new taxes in May. In addition, Indonesian officials announced plans to cap foreign investments in the banking and mining sectors. I’ve been encouraged by Indonesia’s past efforts to foster foreign investment and its prospects for economic growth, but in my view, policies such as these are a step in the wrong direction.
Taking a long-term view, however, we believe that strong economic growth, growing consumer demand and government expenditure on infrastructure development could continue to support the domestic economy. Indonesia has been a thriving economy where private consumption has accounted for more than 50% of GDP.1 Hence, we feel the Indonesian economy is relatively more immune to external shocks than some of its counterparts.
Because natural resources are particularly vulnerable, no matter where we invest we tend to focus on companies in this sector that are diversified, with global operations. On occasion we’ve found government takeovers of private companies can actually have a silver lining for investors. A government-controlled enterprise may be no worse than a privately-owned company under the thumb of one dominant individual, such as a family member. And, ironically, sometimes when a government takes control of natural resource production and then proves incapable of operating it efficiently, natural resource prices can move higher, and in some cases, the government will reverse course and wind up leaving private enterprise alone.
You might think the moderation in growth and concern about protectionism has heightened political risk in emerging markets in general. That’s not necessarily true, in my opinion. Many policymakers are engaging in measures to help keep growth from stalling. And, there are many other countries moving in exactly the opposite direction of nationalization. Colombia is a shining example of a case in which a government is moving toward private sector involvement, not away from it. There’s a friendlier attitude toward foreign investors in Colombia, too. I’m also encouraged by the potential opening of new markets throughout the world where public pressure had led to political change. (See my recent post on Myanmar)
One last word on the subject: while I’m strongly in favor of privatization and against protectionism in general, certain limited policies can be reasonable if they allow domestic industry to thrive without harming global trade or investment. In some cases these policies can serve positive ends; for example, when used to limit environmental damage from over-production of scarce resources.
I am watching for harmful protectionist policies closely, but I believe governments engaging in them will recognize these policies are counter-productive, and that they scare investors away. I believe policies promoting innovation, efficiency, and fair and free trade are a far better path to growth.